KBRA Assigns Rating to Blue Owl Technology Finance Corp. II's $700 Million Senior Unsecured Notes

Rhea-AI Summary

Blue Owl Technology Finance II receives a BBB rating from KBRA for $700 million senior unsecured notes due 2029, with a Stable Outlook. The company's ties to Blue Owl Capital, Inc., diversified investment portfolio, strong management team, and solid financial metrics contribute to the rating. The company's growth potential and funding profile are highlighted, but potential risks include illiquid investments, unseasoned portfolio, and economic uncertainties.

Positive

• Blue Owl Technology Finance II receives a BBB rating from KBRA for $700 million senior unsecured notes due 2029.
• The company's ties to Blue Owl Capital, Inc., diversified investment portfolio, and strong management team contribute to the rating.
• OTF II's financial metrics, including leverage, regulatory asset coverage, and funding profile, are solid.
• The company's growth capital portfolio and sector exposures in technology-related industries indicate growth potential.
• OTF II's management team has extensive experience in private debt markets, enhancing confidence in the company's operations.
• The company's liquidity position is strong with uncalled capital, available bank lines, and cash reserves.
• The additional unsecured debt issuance will increase financial flexibility for the company.
• Blue Owl Technology Finance Corp. II is managed by Blue Owl Technology Credit Advisors II , an affiliate of Blue Owl Capital, Inc., with significant AUM.
• The company's investment strategy aligns with other entities under Blue Owl, enhancing synergies and operational efficiency.
• A rating upgrade is not expected in the near-term, but a Positive Outlook could be considered if asset quality and leverage metrics remain strong.
• A rating downgrade and/or Negative Outlook could result from a significant downturn in the U.S. economy impacting earnings, asset quality, and leverage.
• Changes in senior management or risk management policies could also lead to negative rating action.

Negative

• Potential risks for OTF II include illiquid investments, unseasoned portfolio, retained earnings constraints, and economic uncertainties.
• The company's recent formation in October 2021 may pose challenges due to its unseasoned investment portfolio.
• The uncertain economic environment and geopolitical risks could affect the company's performance.
• A significant change in senior management or risk management policies could lead to negative rating action.

Credit Analyst

The assignment of a BBB rating to Blue Owl Technology Finance Corporation II's senior unsecured notes is indicative of a moderate credit risk, aligning with investment-grade debt. The rating reflects confidence in the company's operational ties to Blue Owl Capital and its substantial direct lending platform. The diversified investment portfolio, largely composed of senior secured first lien loans, suggests a risk-averse strategy focused on stable returns from upper middle market technology-related companies.

From a credit perspective, the company's adequate gross leverage and high regulatory asset coverage signal a healthy balance sheet, with leverage within the target range providing a cushion above regulatory requirements. This positions the company favorably in terms of creditworthiness and debt repayment capacity. The diversified funding profile and the additional unsecured debt issuance will likely enhance the company's financial flexibility. Nevertheless, the potential risks associated with the illiquidity of BDC investments and the unseasoned nature of the portfolio warrant monitoring, particularly in light of the current economic uncertainties and geopolitical risks.

Investment Strategist

The stable outlook accompanying the BBB rating suggests that the market can expect a consistent performance from OTF II, with no immediate factors that would necessitate a rating change. However, investors should note that the company's performance is subject to the volatile nature of the technology sector, which can be influenced by rapid shifts in market demand and innovation cycles. As OTF II's portfolio is heavily weighted towards technology-related industries, it may face sector-specific risks.

For stakeholders, the absence of loans on non-accrual status and the high percentage of investments with the highest internal risk ratings are reassuring, as these are indicators of a robust credit quality within the portfolio. However, given the company's recent formation and the current economic climate, investors should maintain a cautious approach, keeping an eye on the company's ability to sustain its asset quality and manage leverage amidst rapid growth.

Regulatory Compliance Expert

The company's structure as a Business Development Company (BDC) and its choice to be treated as a Regulated Investment Company (RIC) have specific implications. The requirement to distribute at least 90% of investment company taxable income to shareholders could limit the company's ability to retain earnings and reinvest in its business, potentially affecting its growth trajectory. However, this structure also provides certain tax advantages that could benefit shareholders.

Investors should also be aware of the regulatory asset coverage requirements for BDCs, which OTF II currently exceeds, providing a buffer that may protect against potential downturns in asset quality. It's important to monitor any changes in the regulatory environment, as these could impact the company's operations and, consequently, investor returns.

NEW YORK--(BUSINESS WIRE)-- KBRA assigns a rating of BBB to Blue Owl Technology Finance Corporation II’s (“OTF II” or “the company”) $700 million, 6.750% senior unsecured notes due 2029. The rating Outlook is Stable. The proceeds will be used for general corporate purpose, including the repayment of debt.

Key Credit Considerations

The rating reflects the company’s ties to the sizeable $84.6 billion Blue Owl Capital, Inc. (NYSE: OWL) direct lending platform, the derived benefits from OTF II’s SEC exemptive relief to co-invest with other funds managed by the advisor and its affiliates, and its diversified $3.8 billion investment portfolio with 80.7% of the portfolio composed of senior secured first lien loans to upper middle market companies in technology-related industries. The company's traditional finance portfolio, with weighted average EBITDA and enterprise value of $214 million and $5 billion, respectively, comprised 82.6% of total investment as of December 31, 2023. OTF II’s growth capital portfolio comprised 13.2% of the investment portfolio and had a weighted average enterprise value of $12.8 billion. The top three sector exposures by end market were Systems Software (28.0%), Application Software (15.8%), and Diversified Financial Services (9.5%).

Further supporting the rating is OTF II’s strong management team with a long track record of working within the private debt markets, with each member of the Investment Committee having an average of over 30 years of experience in the industry. The company has a team of approximately 30+ tech-dedicated investment professionals and maintains an office in Menlo Park, CA as well as New York City. Due, in part, to the company’s unseasoned portfolio, the company has no loans on non-accrual status and 99.1% of the company’s investment portfolio maintains an internal risk rating of 1 or 2, its highest classifications out of 5. As of 4Q23, gross leverage was adequate at 1.13x with regulatory asset coverage of 188%, allowing for a solid cushion over its 150% regulatory asset coverage requirement and within its target leverage of 0.90x to 1.25x. The company’s funding profile is diversified, and the additional unsecured debt issuance will boost the company’s senior notes as a percentage of total debt and increase financial flexibility. A significant percentage of the company’s outstanding debt includes its fully drawn $800 million subscription facility that is secured by the company’s capital commitments. As of 4Q23, the company’s liquidity is solid with $2.4 billion of uncalled capital, ~$633 million of available bank lines, and $65 million cash. There are no near-term debt maturities and unfunded commitments totaled $353 million.

The strengths are counterbalanced by the potential risk related to the company’s illiquid investments as a BDC and its unseasoned investment portfolio stemming from its recent formation (October 2021), as well as retained earnings constraints as a Regulated Investment Company (RIC) and the uncertain economic environment and geopolitical risks.

Blue Owl Technology Finance Corp. II is a private, externally managed, non-diversified closed-end management investment company that has elected to be treated as a Business Development Company (BDC) under the 1940 Act and to be treated as an RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income. The company was formed in October 2021 as a Maryland Corporation and commenced operations in January 2022. The company is managed by Blue Owl Technology Credit Advisors II LLC, an affiliate Blue Owl Capital, Inc., which had approximately $165+ billion of AUM as of December 31, 2023. The company’s investment strategy coincides with the strategy of Blue Owl Technology Finance Corp. (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Stable Outlook) and Blue Owl Technology Income Corp. (KBRA Issuer/Senior Unsecured Debt ratings of BBB/Stable Outlook). Blue Owl’s technology lending products had approximately $20.0 billion of AUM as of December 31, 2023.

Rating Sensitivities

A rating upgrade is not expected in the near-term. The Stable Outlook could be revised to Positive if OTF II’s asset quality remains solid, despite the company’s rapid growth, and leverage metrics remain appropriate for the company’s risk profile. A rating downgrade and/or Outlook change to Negative could be considered if there is a significant downturn in the U.S. economy with negative impact on OTF II’s earnings performance, asset quality, and leverage. A significant change in senior management and/or risk management policies could also lead to negative rating action.

To access rating and relevant documents, click here.

Methodologies

• Financial Institutions: Finance Company Global Rating Methodology
• ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1003698

View source version on businesswire.com: https://www.businesswire.com/news/home/20240328814168/en/

Analytical Contacts

Teri Seelig, Managing Director (Lead Analyst)

+1 646-731-2386

teri.seelig@kbra.com

Kevin Kent, Director

+1 301-960-7045

kevin.kent@kbra.com

Joe Scott, Senior Managing Director (Rating Committee Chair)

+1 646-731-2438

joe.scott@kbra.com

Business Development Contact

Constantine Schidlovsky, Senior Director

+1 646-731-1338

constantine.schidlovsky@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What rating did KBRA assign to Blue Owl Technology Finance II's $700 million senior unsecured notes due 2029?

KBRA assigned a rating of BBB with a Stable Outlook.

What are some key credit considerations for OTF II's rating?

Key considerations include ties to Blue Owl Capital, diversified investment portfolio, and strong management team.

What percentage of OTF II's investment portfolio is composed of senior secured first lien loans to upper middle market companies in technology-related industries?

80.7% of the portfolio is composed of such loans.

What are the top three sector exposures by end market for OTF II?

Systems Software (28.0%), Application Software (15.8%), and Diversified Financial Services (9.5%).

What could lead to a rating upgrade for OTF II?

A Positive Outlook could be considered if asset quality and leverage metrics remain strong.

What could lead to a rating downgrade for OTF II?

A Negative Outlook could result from a significant downturn in the U.S. economy impacting earnings, asset quality, and leverage.